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16 Cards in this Set
- Front
- Back
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Elasticity
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A measure of the response of one variable to a change in another, stated as a ratio of the percentage change in one variable to the associated percentage change in another variable.
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Price elasticity of demand
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The ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price, other things being equal.
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Revenue
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Price times quantity sold
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Elastic demand
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A situation in which quantity demanded changes by a larger percentage than price, so that total revenue increases as price decreases. (Closer to horizontal) Elasticity value = E > 1
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Inelastic demand
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A situation in which quantity demanded changes by a smaller percentage tha price, so that total revenue decreases as price decreases. Elasticity value = 0 to 1 not including 1
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Unit elastic demand
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A situation in which price and quantity demanded change by the same percentage, so that total revenue remains unchanged as price changes. Elasticity value = 1
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Perfectly inelastic demand
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A situation in which the demand curve is a vertical line. Elasticity value = 0
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Perfectly elastic demand
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A situation in which the demand curve is a horizontal line. Elasticity value not defined.
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Midpoint formula for the percentage change in quantity
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= (Q2-Q1)/((Q1+Q2)/2)
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Midpoint formula for the percentage change in price
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= (P2-Q1)/((P1+P2)/2)
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Midpoint formula for Elasticity
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Percentage change in quantity/ Percentage change in price
((Q2-Q1)/(Q1+Q2))/ ((P2-P1)/(P1+P2)) |
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What are some determinants of Elasticity of Demand?
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1) Substitutes, Complements, and Elasticity
2) Price vs. Opportunity Cost 3) Time Horizon and Elasticity |
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Income elasticity of demand
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The ratio of the percentage change in the quantity of a good demanded to a given percentage change in consumer incomes, other things being equal.
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Cross-elasticity of demand
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The ratio of the percentage change in the quantity of a good demanded to a given percentage change in the price of some other good, other things being equal.
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Price elasticity of supply
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The ratio of the percentage change in the quantity of a good supplied to a given percentage change in its price, other things being equal.
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Tax incidence
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The distribution of the economic burden of a tax.
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